EMPLOYEE RETENTION CREDIT FOR 2021
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) created a refundable payroll tax credit, the Employee Retention Credit (ERC). For 2020, the ERC could be claimed by eligible employers who paid qualified wages after March 12, 2020, and before January 1, 2021, if they experienced a full or partial suspension of their operations or a significant decline in gross receipts. The credit for 2020 was equal to 50% of qualified wages paid, including qualified health plan expenses. The maximum credit per employee was $5,000.
In December 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA) extended the ERC to qualified wages paid after December 31, 2020, and before July 1, 2021, and modified the calculation of the ERC for qualified wages paid in 2021. The American Rescue Plan Act of 2021 (ARPA) further extends the ERC for wages paid after June 30, 2021, and before January 1, 2022.
The IRS has provided guidance to employers on how to determine their eligibility for the Employee Retention Credit (ERC) for 2021. A business is eligible if for any quarter the business had (1) a full or partial federal, state, or local shutdown and were also unable to continue operations through telework, or (2) a significant decline in gross receipts.
For purposes of the credit, a portion of an employer’s business operations will be deemed to constitute more than a nominal portion of its business operations if either: (1) gross receipts from that portion of the business operation are 10% or more of the total gross receipts (both determined using the gross receipts of the same calendar quarter in 2019); or (2) the hours of service performed by employees in that portion of the business is 10% or more of the total number of hours of service performed by all employees in the employer’s business. Both can be determined using the number of hours of service performed by employees in the same calendar quarter in 2019. Businesses considered essential services can qualify for a shutdown if their supply chain is critically disrupted, impacting their ability to operate.
For 2021, the ERC equals 70% of qualified wages that an eligible employer pays in a calendar quarter. The maximum amount of qualified wages an employer may use to calculate the ERC is $10,000 per employee. Thus, the maximum ERC is $7,000 per employee for 2021. ARPA also clarifies that wages used for the ERC cannot be the same wages used to claim PPP loan forgiveness.
A governmental entity that is a college or university, or whose principal purpose or function is to provide medical or hospital care, is treated as satisfying the trade or business requirement and, therefore, is an eligible employer assuming they satisfy the other requirements to be an eligible employer.
For purposes of the 2021 ERC, whether an employer is an eligible employer based on a significant decline in gross receipts is determined separately for each calendar quarter and is based on an 80% threshold; i.e. the employer’s gross receipts are less than 80% of what they were in the same calendar quarter in 2019. An employer can determine whether it meets the gross receipts test for a quarter in 2021 by either (1) comparing gross receipts for the current quarter; or (2) by electing to compare gross receipts for the immediately preceding calendar quarter with those for the corresponding calendar quarter in 2019. An employer that did not exist as of the beginning of that quarter in 2019 would substitute 2020 for 2019.
For calendar quarters in 2020, there was no restriction on the types of eligible employers that could claim an advance payment, nor was there a maximum advance amount. The amount of the employee retention credit eligible to be claimed was subject to the requirement that an eligible employer reduce its payroll tax deposits in anticipation of the credit before requesting an advance. Under the TCDTRA, eligible small employers (employers with an average of 500 or fewer full-time employees in 2019) may elect to receive an advance payment of the employee retention credit in an amount not to exceed 70% of the average quarterly wages paid in the calendar year 2019. The requirement to reduce deposits in anticipation of the credit before requesting an advance continues to apply to 2021 small eligible employers.
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